The view that SoFi Technologies (NASDAQ:SOFI) is trading at bargain levels is a flawed one. There are many reasons why SOFI stock has plummeted 64% this year, but chief among them is the fact that the digital financial services company continues to lose money.
The U.S. economy is grappling with skyrocketing inflation, which is the consequence of a long-standing policy of quantitative easing that led companies like SoFi Technologies to reach a fever pitch in 2021. As long as the Federal Reserve had the money spigot turned on, the markets were happy to overvalue companies that could grow their top line without a care for the bottom line.
While SoFi increased revenue 74% last year to nearly $985 million, the company reported a net loss of $483.9 million, or $1 per share. As inflation and quantitative tightening came to the forefront of investors’ minds in late 2021, they abandoned growth stocks like SOFI in favor of companies that actually make money.
With the Fed intent on further rate hikes and SoFi projected to lose 17 cents per share this year, there’s no reason investors should expect a rebound in SOFI stock.
| SOFI | SoFi Technologies | $5.72 |
SoFi Ponders a Reverse Stock Split
At SoFi’s July 12 annual stockholders meeting, investors will vote on whether to grant SoFi’s board the power to enact a reverse stock split at some point during the next year. SoFi has said the potential split will reduce outstanding shares by a ratio of between 1-for-2 and 1-for-10.
As my InvestorPlace colleague Eddie Pan points out, SoFi is considering this move for three reasons: to make it more appealing to investors and analysts, to improve the perception of SOFI stock, and to make the company more attractive to potential talent.
A reverse stock split is almost never a good sign. It changes nothing about the underlying value of the company and is usually met with scorn by Wall Street. Most investors are smart enough to know there’s no difference between owning 10 shares of a stock valued at $5 and a single share valued at $50. Thus, reverse splits are often viewed as smoke and mirrors meant to distract from a plummeting share price.
Lack of Clarity on Student Debt Weighs on SOFI Stock
Part of the reason SoFi has struggled to turn a profit is the moratorium on federal student-loan payments, which began in March 2020. Student loans were SoFi’s bread and butter — it’s oldest and largest business segment. SoFi CEO Anthony Noto noted in late 2021 that the payment pause has cut SoFi’s student-loan business in half.
In late April, President Joe Biden once again extended the student-loan moratorium, this time pushing it out until Aug. 31. And U.S. Secretary of Education Miguel Cardona recently told a Senate subcommittee hearing it’s possible it could be extended again.
SoFi management has stated that it doesn’t expect a resumption of payments in 2022 and updated its guidance accordingly. Even so, the lack of clarity is likely to continue weighing on SOFI stock.
The Bottom Line on SOFI Stock
SoFi’s updated 2022 outlook calls for adjusted net revenue of $1.47 billion, down from $1.57 billion, and adjusted EBITDA of $100 million, down from $180 million. Since lowering its guidance in early April, SOFI stock is down more than 40%.
There’s nothing to suggest that investing in SOFI stock now is a good idea. The best argument I’ve heard is the notion that it can’t drop further. I don’t believe that’s the case.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
